We're Number Two!

Last week, Brett Arends of MarketWatchreported that, for the first time since Ulysses S. Grant sat in the White House, the United States no longer has the world's largest economy. That honor now belongs to China. Recent International Monetary Fund figures show that China will produce 17.6 trillion dollars worth of goods and services in 2014, while the United States will produce 17.4 trillion dollars worth of goods and services. America still produces more than China on a per capita basis, but as recently as 2000 we produced three times as much as China in absolute terms. China now accounts for 16.5% of the world's economy, while our share has fallen to 16.3%.

China has succeeded in building the world's largest economy in large part because the Chinese are emulating 19th century Americans. When we were overtaking Britain to be the world's largest economy, we knew that production was more important then consumption and saving was more important than spending. The Chinese have come to believe that, even as we are told that consumption is the basis of prosperity and the surest way to help the economy is to spend, even if that means going into debt.

America in the 19th century also protected our economy from foreign competition, even as our most important competitors, the British, came to embrace free trade. As the British stubbornly clung to free trade, they watched their economy be surpassed first by the protectionist Americans and then by the protectionist Germans. Today, we are the ones who have foolishly embraced free trade, while the Chinese protect their manufacturers from foreign competition and watch their economy grow.

To regain what we have lost, we must look to the wisdom of our forebears and not the folly offered by today's self-proclaimed experts.

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Ray OlsonSt. Paul12/8/2014 09:10 PM

Hear, hear! Excellent post.

Highly IrregularCitta' del Vaticano12/8/2014 11:49 PM

The US is actually number three. The EU is in first place, and has been for a number of years now. It didn't get there by practicing outmoded 19th century economic nationalism either.
Tariffs won't save you. They will only accelerate your decline.

Harry HellerSan Francisco12/9/2014 03:44 AM

This post is a masterpiece of concision. But are we certain that China has overtaken us? I'm not an economic expert, and immersion in the writings of Austrian School political economy has left me chary of all government economic statistics (Rothbard was a master at explaining their flawed methodologies and hence limited usefulness). But that suspicion has to work both ways. American real GDP is wildly overstated, and both inflation and unemployment understated, as a function of Keynesian (and other false) assumptions built into them. And China? The Chinese in recent years have been financing a grossly inefficient construction boom, with "dead [uneconomic] projects" and even "ghost cities" scattered everywhere, in part to prevent a severe, and possibly socially destabilizing, economic contraction (or at least decrease in China's usual rate of growth). The Western belief is that the CCP could be in serious political trouble if there should suddenly be drastic unemployment among the tens (hundreds?) of millions of uprooted peasants now transplanted to cities. To what extent is China's real GDP artificially pumped up by such wasteful spending (similar to our own insane 2009 $800bil "stimulus")? Furthermore, China's environmental degradation, a form of unsustainable economic parasitism (conservatives surely understand that, just as we cannot live off credit cards (debt) forever, so we cannot exceed our ecological 'carrying capacity' forever, either), is well documented, and must eventually be stopped, and then, to some extent, reversed, which will in turn reduce future growth rates, as well as cost a lot of money. The US, of course, is in environmentally much better shape (indeed, our own EPA is an engine of economic immiseration, tamping down what could be our natural rate of economic growth for little real ecological benefit - our environment at the current level of regulation would be better served by limiting immigration than by further emissions restrictions).

Harry HellerSan Francisco12/9/2014 04:22 AM

Additional thoughts. No conservative or Austro-libertarian could disagree with Mr. Piatak's well-stated second paragraph. Production must precede and over the long run exceed consumption, and savings (intelligently) deployed as capital is what finances real future growth in living standards. The enormously complicated current Chinese economic 'system' has a huge bias towards savings (in part because China follows another 19thC American practice in having almost no social(ist) "safety net" - rather ironic for a still nominally "communist" country!), though as the CCP itself acknowledges the need to develop a more robust consumer economy, the astronomical rate of savings might be expected to decline, and at an accelerating rate, in the future. Whatever the CCP does to stimulate demand, however, it should be understood that China's "growth spurt" is over. That growth was largely a function of China's having been, in effect, artificially developmentally held back from what ought to have been its real GDP by the economic (and sociological) insanity of the Maoist era. Once Deng around 1978 began to reintroduce market precepts into China ("To get rich is glorious"), an innately intelligent, industrious and historically great people could finally take off (just like the earlier rise of the "Asian Tigers"). The real story, however, is not that of protectionism as some key to national prosperity, but rather, how all these developing economies are able to parasite off Western-invented commercial techniques and technologies. The West is sui generis; our ancestors did the hard work of building the modern world from scratch. Conversely, it's relatively easy for smart foreigners simply to copy the West, and thereby "catch up" quickly (especially when liberal utopians insist that we educate the foreigners in our hard-won achievements, or when corporations are willing to share our knowledge for tiny increases in short-term profits -"selling the rope" obviously comes in many guises).

Harry HellerSan Francisco12/9/2014 04:56 AM

Mr. Piatak's third paragraph is more problematic. Mr. Piatak, along with his intrepid hero Pat Buchanan, surely recognizes that "correlation does not equal causation". That the US grew enormously wealthy during a 19thC when we protected our infant industries with a "tariff wall" obviously does not necessarily mean that it was the protectionism that was most (or even minimally) responsible for our economic dynamism. Any good economic conservative will point to our fundamentally (internally) laissez-faire system, with its almost nonexistent business regulation; a mostly unpolluted natural environment ripe for exploitation; huge tracts of land there to be developed; ultra-strong/legally protected private property rights; no Federal income tax; for much of the time, no central bank (and therefore widespread "hard money" and its salutary deflationary effect); no "civil rights"-based inefficiencies intruding upon commercial relations; and no legions of welfare bums and inherently unnecessary government "workers" draining away national savings towards non-value-added purposes. Our money today goes, in part, not towards building the industries of the future, but subsidizing the reproduction of low-IQ, ill-disciplined and disproportionately criminal elements within all, as well as between, demographic groups (I accept that legalized abortion is indefensible on theological as well as defense-of-Christian-civilization grounds, but let's be "real" just once: do paleos grasp which sociological stratum most of the 30-40 million children aborted since Roe actually came from, and what the effects on civilized American order would have been with their, er, presence? Think of America's underclass on display in Ferguson, MO, and other points in recent months, and then imagine it with an additional 20+ million members. Good for the economy - or the nation?). Protectionism may well have been merely incidental to America's rise, with other factors having been far more dispositive.